My Thoughts On Investing in Gold Bullion

With the price gold near record historic highs (despite a huge drop in value over the previous few days), I’ve received a couple of emails over the last few months about whether or not investing in gold is a good idea in these “tough economic times”.

Call me a cynic, but I do not believe gold is as safe an investment as many financial analysts and brokers (Monex, Goldline and APMEX) lead us to believe. In fact, I might go as far to say some of these gold dealers are guilty of false advertising.

Here’s my response to what I feel are “mythical claims” on why investing in gold (simply for the fact that it is gold) is a smart financial move.

Myth #1: Gold Will Never Be Worth Nothing:

While it is true gold may never be worth nothing, it is also true that cow manure may never be worth nothing (it can be sold as fertilizer which can actually be used to grow something of real value).  Here’s a few points to consider:

Oil will never be worth nothing because you can burn it to stay warm.

Grain will never be worth nothing because you can eat it and stay nourished.

Gold will never be worth nothing because it looks pretty and has good conductive properties.

Which of the preceding three commodities would you give up in during an emergency?

Myth #2: If the Value of the US Dollar Falls, the Purchasing Power of Gold will Remain Relatively Unchanged:

That’s interesting, so does that mean we lug our gold bullion around with us when we need to buy groceries, gas, and other necessities? How is this process going to work? Are we supposed to shave off a few flakes of gold onto a scale at Wal-Mart or Mobil station to pay for our purchases?

Myth #3: Gold Has Historically Outperformed the Stock Market:

Wrong again! When you look at the cumulative returns of gold vs. the Dow Jones Industrial Average (DJIA) and adjust them for inflation, you will see the overall return of a gold investment is about half that of a comparable investment in the DOW. Consider the following chart from Stocks for Beginners:

Myth #4: Gold Increases in Value When the Economy is Bad:

Again, this is not always the case. As I mentioned in my article about the efficiency of the financial markets, if it were indeed true that the price of gold increased in value when the economy was bad, then more and more people would begin buying gold on “speculation” that the economy was going to turn bad in the near future. Eventually, an equilibrium will be reached where just as many people think the economy is going to be bad as there are people who think the economy is going to be good. The problem is, there is not one person that knows exactly when this equilibrium occurs.

Should You Invest Any of Your Money in Gold:

While I’m against investing in gold for any of the aforementioned reasons, I do believe wise investments can be made (as part of a well diversified portfolio) in companies that mine and refine gold for the value it holds as an actual raw material (for its conductive properties in electronics, fashion in jewelry, etc.).

Gold should be valued for its true value as a raw material and not by the misguided believe that it has some sort of magical property that protects its value during tough economic times.

Of course, this is just my opinion and as always, I welcome yours in the comment section below.

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